Optimising Your Small Business Tax Strategy

Ensuring that your business is tax-efficient means more money in your pocket.

By optimising your tax strategy, you can safeguard your small business’s profits and build a stronger foundation for sustainable growth. Here, we’ll explore strategies to make your business more tax-efficient.

Selecting the right business structure

Your chosen business structure will have significant tax implications.

While setting up as a sole trader offers flexibility and simplicity, you’ll need to pay at least 20% income tax on the profits. You may have fewer legal hoops to jump through — but you’ll also face limited tax-planning opportunities.

The same goes for partnerships. Each business partner must pay income tax on their cut of the profits.

Meanwhile, limited companies pay corporation tax. Depending on how much money your company makes each year, you’ll need to pay between 19% and 25% on your profits. This means many companies are taxed at a lower rate compared to sole trader businesses and partnerships.

Maximise allowable expenses

Understanding how to make the most of your allowable expenses can also help you improve your business’s tax efficiency.

The exact rules surrounding expense claims will vary depending on your business structure, so you should always check before making your claim.

Office costs

  • rent for business premises
  • utilities (such as electricity and water bills)
  • phone bills
  • office supplies (such as stationery, computer software and furniture).

Travel costs for business trips

  • road fuel
  • train and bus tickets
  • hotel rooms
  • meals and other necessary travel costs (also known as subsistence)
  • parking fees and tolls.

Staff expenses

If you’re an employer, you can deduct a number of employee expenses from your taxable income, such as:

  • staff salaries, commission payments and bonuses
  • pension scheme contributions
  • employee benefits (such as health insurance or childcare support).

Reselling goods costs

If you sell products in your business, the direct costs involved in production and distribution are deductible, such as:

  • the cost of raw materials
  • production costs
  • delivery fees
  • packaging costs

Legal and financial costs

  • insurance policies (including public liability, property and professional indemnity)
  • professional service fees (such as the cost of an accountant, lawyer or business advisor).

Explore available tax reliefs and credits

There are numerous tax reliefs available to businesses that can significantly reduce your tax bill.

Capital allowances

Capital allowances let businesses deduct a portion of the value of certain business assets from their profits before tax.

For example, annual investment allowance (AIA) allows businesses to deduct up to £1 million on qualifying assets before tax. This applies to various plant and machinery — but does exclude business cars and items also used for non-business purposes.

Corporation tax relief

As mentioned, limited companies often have access to more tax breaks.

Innovative businesses engaged in qualifying activities can claim research and development (R&D) tax credits to reduce their tax liabilities. Or, if your company is in the creative sector, you could qualify for creative industry reliefs such as film tax relief or theatre tax relief.

You can claim these reliefs on your company tax return yourself, but an accountant can ensure you stay compliant and help you make the most of them.

Paying yourself in a tax-efficient way

If you run a limited company, you may be able to reduce your liabilities by paying yourself a combination of salary and dividends.

As a director, you get to decide how to pay yourself. Generally speaking, dividends are taxed at a lower rate, making this method a more tax-efficient way of extracting funds. That said, it’s still worth taking a small salary as well, as this can affect your state pension.

Consider the VAT threshold

VAT registration is mandatory once your turnover exceeds a certain threshold, currently £85,000 — but there are benefits to signing up earlier. As the owner of a VAT-registered business, you’ll be able to reclaim the VAT you pay on goods and services for your business.

Stay compliant

While this might sound rudimentary, late payment penalties and non-compliance fines can quickly add up. You should keep a close eye on important dates and deadlines to make sure you file your taxes on time.

It’s also a good idea to double-check your tax calculations before finalising your tax return. Cloud accounting software can make this easier — or you could hire an eagle-eyed accountant to reduce the chance of error.

Contact us to find out how we can help optimise your SME’s tax strategy.

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